In the low-yield environment that has persisted since the end of the financial crisis, income investors have been starved for opportunities to collect what once were considered even adequate yields. However, there are still some opportunities to collect current income and in this article, we'll take a look at a preferred issue from the storage space that pays a very nice yield and has some shareholder protection clauses that should alleviate some risk. The issue in question is the General Finance Corp. (NASDAQ:GFN) Series C Cumulative Redeemable Perpetual Preferred Stock (GFNCP, may differ slightly depending on your broker) and we'll see if it could be a good fit for your income portfolio.
To begin, we'll define exactly what this issue is. GFNCP is a traditional preferred stock, meaning it has no stated maturity date and no debt issue backing it. As such, it pays regular quarterly dividends and at the issue price of $100 per share, the $9 annualized dividends equal a 9% coupon yield. With shares trading at a slight premium to that price, $103.50 as of this writing, the current yield is still very strong at 8.7%.
As I said, there is no stated maturity date on this preferred issue but it does have a call date. Beginning in May of 2018 General Finance can call this issue at any time. Whether this will happen or not depends on a lot of things and it is impossible to predict what rates will look like in 4+ years or what GFN will choose to do. However, it is something to keep in mind if you are thinking of adding GFNCP to your portfolio; you may be called away in 2018 or later for $100 per share. If this bothers you, perhaps waiting until GFNCP trades under $100 would alleviate some risk as you'd then be entitled to a capital gain on your position in the event of a call. Companies typically don't issue preferred stock so that they can redeem it five years later but again, it could happen so you need to be aware of it. Besides, between now and the call date you're entitled to $36+ per share in dividends so the potential for a $3 capital loss isn't really that big of a deal.
Another nice feature of GFNCP is that it is eligible for the preferential dividend tax treatment that allows holders to boost their after-tax return. This is a material positive for those holding GFNCP in a taxable account as a theoretical scenario where its dividends are taxed at 15% versus 30% if it weren't eligible for the favorable tax treatment shows after-tax yield is boosted 135 basis points. This is a significant positive and shouldn't be overlooked.
I mentioned this issue has some shareholder protection built in that is unique to this particular issue so we'll take a look at that now. First, dividends are cumulative, meaning that if GFN misses dividend payments it is obligated to make them up. Thus, barring a bankruptcy scenario, dividends are guaranteed on GFNCP. And the best part is that if GFN continues to miss dividend payments, it gets punished via higher dividends on GFNCP. If GFN misses two dividend payments the annual dividend jumps $2 per share and for each subsequent missed payment, it continues to increase $2 until it is $19 per share; once all dividends are paid the coupon reverts back to $9. In addition, if GFNCP is no longer listed on the NASDAQ, GFN raises the dividend $2 as long as the listing failure persists. As you can see, GFN has massive incentives to continue to pay dividends on GFNCP and I believe it provides unique protection to holders, making the issue more attractive.
GFNCP is for more enterprising investors willing to buy preferred stock in a company that is underfollowed and sports a market cap of only $165 million. However, the company has a book value of $140 million and net tangible assets of $56 million and it produced $31 million in EBIT last fiscal year. While a discussion of GFN's business is outside the scope of this article, the bottom line is I think this issue is safer than it would appear at first glance. If you can stomach the idea of owning a preferred in such a small company, GFNCP could provide a great boost to your income portfolio while offering some protection to your capital.